Financial perils follow years of big payouts in pursuit of faculty stars.
At the University of Minnesota's Medical School, there's no national search in the works for a crucial position in the Department of Medicine, nor will there be soon. Money is too tight.
Big plans for a research park in the shadows of TCF Bank Stadium have been scaled back, and a nationally acclaimed professor is leaving because his pay was slashed.
Inside the dean's office, a discretionary fund for hiring and innovative projects is tapped out and U President Bob Bruininks is subsidizing the Med School budget with a recurring allocation of $2.85 million.
Those are only some of the signs of financial stress gripping one of Minnesota's most vital academic and research institutions following an ill-fated arms race in recent years for prestigious faculty -- a push that sent costs soaring just as some of its key revenue sources declined.
"We've had a challenging three years," said Dr. Wes Miller, a bone marrow transplant physician who was moved to the Medical School's administration in 2008 to help stop the bleeding of cash.
The 123-year-old school, which performed the world's first successful open heart surgery, is the biggest single source of physicians in Minnesota and has been an important factor in the creation of the region's biomedical industry.
As the state's largest public medical research institution, its faculty members not only see patients, they work on new treatments and cures in areas that include cardiology, diabetes, cancer, Alzheimer's disease, stem cell science and HIV/AIDS.
Now, although finances have stabilized, the school is still in the midst of a difficult retrenching.
Between 2005 and 2009, cash reserves were depleted by $34 million. That serious drain occurred partly for reasons that were out of the U's control, such as a decline in federal research funding. But it also was the product of an expensive hiring spree in the hunt for growth and more prestige. To cover the Med School's sudden deficits, the U's central administration took an extraordinary step: It authorized an internal loan of $16 million.
"It was the first time we'd done it for that purpose," Med School Chief Financial Officer Pete Mitsch said.
At a faculty meeting last fall, microbiology Prof. Patrick Schlievert warned that the financial malaise could lead to teaching resignations -- a statement that foreshadowed his own departure after 31 years at the U. Effective July 1, Schlievert, a pathogen expert who discovered the cause of tampon-related toxic shock syndrome, will be the new head of microbiology at the University of Iowa's Carver College of Medicine.
His federally funded research at the University of Minnesota has led to patents and the formation of two companies. He was first to describe the flesh-eating disease that killed Muppets creator Jim Henson and has been involved in discoveries relating to at least 18 diseases.
"I don't feel like the Medical School or the department was personally picking on me," Schlievert said last week. "It's just that the basic science departments are cut to the bone. The only thing we have left to burn is the furniture."
Schlievert, a cherished collaborator at the Minnesota Department of Health, said he went looking for a new job after the U couldn't assure him that his pay would be restored and stabilized after it was cut last year by $24,000. The reduction was directly tied to the Medical School's financial difficulties, he said.
"The financial crunch is a big one," said Schlievert, a member of the U's Academy of Distinguished Teachers. "Do we really have an organized direction, or are we just in salvage mode?''
A financial recovery plan published one year ago said recurring expenses at the school outweighed recurring revenues by a withering $10 million a year.
"This situation is not sustainable," the report said. "Without aggressive programmatic changes and more careful financial planning, the Medical School will be unable to invest in its most important activities or to develop new programs and initiatives."
The Medical School also is in a vulnerable financial position at a time when the Legislature is considering deep cuts in state spending.
Race for rankings
The Medical School's difficulties resulted in part from outsized ambitions. The hiring spree --which lured new department heads with expensive "dowries" -- was a tactic employed under then-Dean Deborah Powell's push to reclaim a top 20 ranking among medical schools. The school's current ranking is 29th; the top 20 goal has been shelved.
The rankings are based on federal research dollars that a school receives. The plan was to beef up faculty, win more grants and climb the chart.
In 2006, 2007 and 2008, the Medical School recruited six department heads and three directors of major research institutes. Their incentive packages, or "dowries," consisted of allowances to build research programs with additional faculty. Mitsch said the recruitment packages exceeded $120 million over seven years.
The hiring of Dr. John Schreiber exemplified the times. As incoming chair of pediatrics in 2005, he received a six-year, $18.7 million package that included money for several new division directors, retention of a lung specialist and a smattering of new faculty members. He left after three years, before all the money was paid out.
The overall expansion under Powell and then-Senior Vice President for Health Sciences Frank Cerra backfired when supporting revenue streams from federal grants, the state, the university and clinical partners didn't evolve as hoped. And with the stock market tanking, there also were shortfalls in payments from some endowments.
"To make a long story short, the additional resources garnered were not sufficient to cover the commitments," Mitsch said.
Getting out of the mess required a restructuring that dropped $8 million of the commitments and extended an additional $29 million into future years. Mitsch said the changes were negotiated between the dean's office and the recipients of the packages.
A visible impact of the financial crunch was the "Biomedical Discovery District" adjacent to the U's new football stadium. A glimmering plan for four new research buildings and a pair of parking ramps has since been downsized to two new facilities and a round of lab renovations.
Another lasting result is a holding pattern -- not a freeze -- on new hires.
It could be more than a year, for instance, before a national search begins for a new chairman of the Department of Medicine. The job will require a recruitment package that the school isn't ready to fund.
For now, the U can lean on Miller. He and other department chairs have directed turnarounds with a combination of belt-tightening, increased research funding and more money from the hospitals and clinics that benefit from patient care provided by faculty physicians.
"We're building it back,'' Mitsch said. "The Department of Medicine had the biggest issues, and they have recovered totally.''
Playing 'small ball'
In Miller's brand of "small ball," manufacturing results with hustle and moxie, he intensified the mentorship of junior faculty to help them secure research grants. The result has been a 30 percent increase in funding from the National Institutes of Health.
He consolidated divisions in the department to help strip out $1 million in administrative expense and negotiated new deals with the school's patient care partners that helped boost clinical earnings by $20 million. Miller also bargained for six months to cut faculty clinical pay by 2 percent for one year.
"We demonstrated the will to make difficult choices,'' Miller said.
Mitsch said financial results in fiscal year 2010 have helped return the school to a steady position sooner than expected.
But red ink could flow again as quickly as fiscal 2012, "depending on how big of a hit we take from the state,'' he said.
The school's cash reserves were spent down beginning in 2005 by more than half. The reserves rebounded last year to $38.7 million, but Mitsch said the cash balance is still undersized for an enterprise the size of the Med School.
With a budget of nearly $850 million a year, the Med School is by far the biggest single franchise at the U. It derives funding from three similarly sized sources: research grants; the practice of medicine by faculty physicians, and a bucket of other revenue that includes state aid, tuition and gifts. Last year, state aid was 10.2 percent of the school's funding, or $86.5 million, including more than $13 million from cigarette taxes.
Annual enrollment at the Med School is 920 students, including 240 in Duluth. The students pay among the most expensive public medical school tuition in the country, but the sum of those payments is less than half of what the school receives in state aid.
Dean Aaron Friedman said the Med School could probably withstand a 5 or 6 percent cut in state funding without losing programs. But if Senate discussions of an 18 or 19 percent cut materialize, the school will have to drop operations that aren't essential for accreditation, he said. He would aim first at nonessential programs that help deliver health care and physicians to outstate Minnesota.
"We'd have to reduce those services in the next fiscal year,'' Friedman said.
Another potential hit could come from a state-funded program that pays hospitals, clinics and other health care providers to train medical students. A potential trickledown effect would be a shrinking of Med School enrollment for lack of training positions.
The U president's recurring $2.85 million allocation to the Med School also is subject to reduction depending on the size of the state cut. That subsidy is separate from the $16 million internal loan that is being paid back at a rate of $2.3 million a year.
Tony Kennedy • 612-673-4213